Monetarism

What Is Monetarism?

Monetarism is the school of thought, most closely associated with Milton Friedman, holding that changes in the money supply are the dominant force behind movements in nominal output and, over time, inflation. Its best-known slogan is Friedman's dictum that inflation is always and everywhere a monetary phenomenon. Monetarists are skeptical of active, discretionary stabilization policy; in AP Macroeconomics the school is identified with the argument that a steady, rule-based growth rate for the money supply is preferable to fine-tuning by central bankers. Friedman also advanced the permanent income hypothesis and, with Edmund Phelps, the natural rate hypothesis, which denies any lasting tradeoff between inflation and unemployment.

Why It Matters

Monetarism reshaped central banking. Friedman's analysis of monetary history and his critique of discretionary policy influenced how the Federal Reserve and other central banks came to prioritize controlling inflation. The natural rate hypothesis, developed independently by Friedman and Phelps in the late 1960s, undercut the idea that policymakers could permanently buy lower unemployment with higher inflation, reshaping interpretation of the Phillips curve. Friedman received the economics prize in 1976 for his work on consumption analysis, monetary history, and stabilization policy. While few central banks now target money-supply growth directly, the monetarist emphasis on the long-run monetary roots of inflation remains embedded in mainstream macroeconomics.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• Which school of thought holds that changes in the money supply are the dominant driver of nominal output and inflation, and is most closely associated with Milton Friedman?
  Monetarism
• In AP Macroeconomics, which school argues that a steady, rule-based growth rate for the money supply is preferable to discretionary stabilization policy?
  Monetarism